The Transparent Trap: Counter Culture Releases Dir...

Mike White at ShotZombies.com reports that Counter Culture Coffee has just released their first annual Direct Trade report – a compact five page PDF clearly laying out prices paid, the last time the producer was visited and the length of the relationship. Based in Durham NC, Counter Culture was one of the first roasteries to use the designation “direct trade.” From CCC:

Peter:
Thanks for the reply, for listening carefully to what farmers want, and for the humility to recognize that there are limits to what a roaster can do! (Kim was actually kind enough to make a similar comment on my blog recently after I posted a reflection about how roasters are investing at origin and why.)
Michael

Good question about non-coffee-quality related projects. That’s what I was obliquely referring to in my first post when I made reference to “other benefits” a roaster can provide to a coffee producer.

We often wind up supporting non-coffee-quality projects with our producer partners. We need to be careful about that, however: we recognize that we are coffee experts (specifically coffee roasting and sourcing experts), NOT development experts. We have found that sometimes well-meaning roasters might do no harm than good by trying to do inappropriate development projects in the community where they work. So we try to avoid that, and are very careful to think carefully about anything we support.

That said, we have supported livestock, educational materials, reforestation projects, and a variety of other community-development activities with our partners. Often, this comes up during conversations and visits, and is one of the important byproducts of the face-to-face interactions that come with Direct Trade relationships.

So what are the themes that come up most often? I would say that education and infrastructure development would be the two most common non-coffee related categories of projects we can do. Another thing that makes farmers lose sleep at night- the pattern of young people emigrating away from the community to work abroad- is often addressed simply by social activity. We’ve seen young people get inspired by coffee simply by their community being recognized as a good coffee producer, and knowing that Valle del Santuario or Jagong or Kiryama or whatever is famous for its coffee quality. Yet another benefit of transparency!!!

Peter:
Impressive. You not only made good on your promise to answer any question publicly or privately, but did it same-day.
I appreciate the detail and love the term “price discovery”. I work with smallholder farmers at origin and am trying my best to help them understand the Direct Trade model. In that context, I will use “price discovery” and be sure to cite you when I do.
One more question then I promise to go away for a while. Do your producer partners ask you for support for community-development activities that aren’t necessarily directly related to coffee production or quality? If so, are there one or two themes that tend to echo loudest in those conversations in terms of what — besides coffee production and quality — might be causing farmers to lose sleep at night?
Thanks and congratulations again on taking this step and committing to do it annually moving forward.

You ask a very good question, and the answer is quite complex. Price discovery, i.e. finding the “fair” price for a farmer, can be a difficult thing. Here are some of the guidelines we use:

1. It’s important to start by understanding a farmer’s cost of production. If a farmer knows what it costs him to produce a pound of coffee, plus what he expects to profit from that year’s harvest, that is an excellent place to start price discussions. Unfortunately, most farmers have no idea what their costs of production are, and have become so accustomed to simply accepting the prices they are offered that open negotiation is an alien concept. We actively seek to help farmers understand their own costs, because it helps create a good foundation for open, constructive negotiation. Now; farms’ costs of production can vary dramatically due to local costs/economics, farm size, and a number of other variables. A farm in Costa Rica might need 2.10 to grow a pound of 85+ coffee, while a farmer in Bolivia might be able to do it easily for 1.70. Costs of inputs, transportation, labor, etc. etc. all come in to play. This is one reason you see some variation in prices here.

2. We don’t ever seek to impose a “take it or leave it” price to any of our producer partners. We get together with a farmer or co-op, and have an open and honest discussion about costs, quality, and price expectations. We then establish a fair and mutually acceptable price structure, always with incentives for better quality, shake on it, and establish a transparent contract (often based on K.C. O’Keefe’s Transparency Contract). This negotiation is often done by Kim Elena Bullock, who we employ as a Producer Relations person. A giant part of her job is facilitating this conversation, in fact she is in Colombia doing just that right now. Others in our coffee department, like me or roaster Tim Hill, might also engage in this conversation. The important thing is that it is based on trust and takes everyone’s needs into account. Producers often suggest tweaks to the pricing structure, and we often comply. We see it as a collaborative, egalitarian approach to price discovery, based on the relationship and on coffee quality.

3. Ok, with that in mind: the Valle Del Santuario prices in 2009 worked like this: we had three quality levels, 85-86, 87-91, and 91+. These corresponded to three price levels, 1.85, 2.20, and 3.53. Does that make sense? I realize the table on the report is not perfectly clear.

4. Improvement over time- in general, we have seen quality improvement over time. Progress is rarely smooth, however. Sometimes, climactic issues trigger an increase in certain kinds of defects, or might move quality up or down a notch. It is key to remain engaged, and keep the eye on the prize: LONG TERM quality improvement and mutual benefit. But yes, we have seen actual, tangible improvement in quality (and therefore price) over time with everyone we have long-term relationships with. Cupping training, agricultural support, increased knowledge, increased trust, and experimentation have all resulted in quality improvements across the board. In terms of magnitude, it varies. Also, it’s a lot easier to improve from 85 to 87 than from 87 to 90. We’re still learning as we go, and still improving across the board!

5. I’m as confused as you are about the “Transparent Trap” title. I don’t feel transparency is a trap at all. Come on in, the water’s fine!

Thanks so much for leading by example. I suspect no one knows better than you that lack of transparency in pricing has been a leading critique of the Direct Trade model…I hope that this helps to tamp down some of that criticism, and that other Direct Trade roasters will follow your lead here.

Thanks, too, for your offer to answer specific questions in public or private — I hope you don’t regret it after reading through the rest of this comment.

I appreciate your efforts to contextualize prices here. One question it begs for me is about the relationship between the prices and quality tiers in the case of the Valle del Santuario coffees. You reference two discrete quality bands here — 87-90 and 91+ — that seem to correspond to set price levels. First, am I reading your response correctly? Second, how do you set these quality-price relationships? I ask because they do seem to vary from one origin to the next. Any light you can shed on that calculation would be most welcome.

As much as I appreciate the radical transparency about prices, however, the far right column may ultimately be the most important one for the grower over the long run — the duration of the relationship. Regardless of the price level, the continuity of a direct relationship with a valued commercial partner at a quality premium is what every farmer wants. Within the context of that relationship, there is room for engagement on price, quality, and other issues of mutual interest. One question I have is what the track record has been, especially in the cases of your longest-running partnerships, in terms of quality improvements. Do farmers/coops really improve over time? What is the magnitude of the change in terms of cupping scores? Are improvements generally linear, or is it a two-steps-forward-one-step-back kind of dance?

Thanks again, Peter, for the report and the post.

Sprudge:

Why “The Transparency Trap?” The implication of the title is that somehow Counter Culture has taken a hit for opening its books. Beyond some mild surprise at some of the price levels, it seems like the response has been — appropriately — very positive.

First of all, I want to thank everyone who has recognized us on the release of this first transparency report.

While I appreciate all of those who have congratulated us for our “guts”, I don’t really see it that way at all. In my mind, if you’re going to talk about transparency, you have to follow through. We’ve been talking about transparency for years now, and have always had the willingness to discuss prices paid openly. Surprisingly, nobody ever asked us! Taking the step of being proactive, and beginning a real conversation about coffee prices with real transparency was the logical next step for us.

Of course, this kind of thing entails a risk. Sadly, in the modern era, a move towards transparency seems to trigger a critical reaction first. I don’t know why people tend to make snap judgements before asking questions and discussing, but they do. The thing about releasing apparently simple information, as we have in our transparency report, is that nothing is simple, and any report of this kind requires context. Let me provide a little of that context.

An important feature of our Direct Trade program is a connection between quality and price. We need to send a clear message to coffee producers: that increased quality equals better price. Therefore, as you can see in the document, we establish contracts that make it clear that lower quality coffees fetch lower prices, and higher prices are easily attainable by achieving higher quality. Look at Valle del Santuario for example- the 85 level price was 1.85. However, the 87-90 price was 2.20. The 91+ price level was 3.53. We seek to purchase coffees in the higher price levels, and work as hard as we can to achieve that. And we have been successful- we are extremely proud to say Valle Del Santuario- like nearly every long-term relationship we have- has increased the quality, and therefore increased the price paid, every year so far. Every producer we work with has the opportunity to fetch spectacular prices. To the reader, those prices on the low end might jump out- but that’s misleading. We seek to move forward, and we’ve designed incentives that reward that forward motion. And that’s exactly what is happening.

Second, you have to realize that this is a report that is in the past. This represents coffee delivered in 2009, and therefore all of this coffee was contracted in 2008, 2007, and 2006. Next year’s report will reflect the coffee delivered in 2010, but was contracted in 2007-2009 etc. Anyone who has bought coffee over this period knows that the relative value of the dollar, and “good” coffee prices, changed dramatically over this period. It’s tempting to compare these prices to current good prices, but that would be a mistake.

Finally, as I said before, a report like this is a snapshot. It cannot capture all the externalities of a dynamic coffee purchasing program. The truth is a coffee roaster offers all sorts of benefits to their partners besides dollars and cents. I’m happy to share those details too if you wish.

We offer this report in the spirit of openness and discussion, in the hopes that it will drive all coffee roasters towards better transparency and honesty. To be provocative, but I really do hope that those who talk about transparency will make more information available with humility and collaboration in mind. I look forward to learning a lot! Meanwhile, I’m open to answering any specific questions either privately or publicly.

First off, let me say that I agree that doing something like this takes “big cojones” and I highly respect Counter Culture and Peter Giuliano in general.

However, I too am surprised that the listed FOB pricing is as low as it is in many instances on their initial report. I do like the “transparency” and “marketing” angles about this program and if the end result is that it puts more money directly into the hands of the farmer, I’d be very happy about that. I will be curious to see how this program develops and maintains over time though…